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Written Testimonies & Filings The following comments were submitted to the Federal Trade Commission (FTC) for consideration in the commission’s scheduled July 1 vote on whether to rescind the . . .
The following comments were submitted to the Federal Trade Commission (FTC) for consideration in the commission’s scheduled July 1 vote on whether to rescind the 2015 Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act.
In antitrust law, the Consumer Welfare Standard (CWS) directs courts to focus on the effects that challenged business practices have on consumers, rather than on alleged harms to specific competitors.
Critics of the standard claim this focus on consumer welfare fails to capture a wide variety of harmful conduct. In addition to believing that harm to competitors is itself a valid concern, critics of the CWS believe it leads to harmful concentrations of political and economic power by biasing antitrust enforcement against intervention. Under this view, the CWS contributes to such harms as environmental degradation, income inequality, and bargaining disparities for labor.
But returning to a pre-CWS state of the law would lead antitrust enforcement to become confused, contradictory, and ineffective at promoting competition. The CWS makes antitrust economically coherent and democratically accountable.
The CWS is agnostic about how much antitrust enforcement is necessary. Indeed, many advocates of more vigorous antitrust enforcement are also defenders of the CWS. The standard uses objective economic analysis to identify actual harms and to recommend remedies when those harms are not outweighed by countervailing benefits to consumers. While the issues the CWS critics care about may be important, antitrust law is a bad way to address them.
Competition usually has to hurt competitors. Prioritizing competitor welfare over consumer welfare, as some proposals would, means abandoning competition as the goal of antitrust. Businesses want a quiet life and large profits. If one firm outcompetes another with a better product or a lower price, it disadvantages that competitor by lowering its profits or forcing it to work harder to maintain them. The consumer ultimately wins in this struggle. Basing antitrust liability on conduct that “materially disadvantages” competitors would impose liability for the act of competing itself.
The old model of antitrust was incoherent and unaccountable. Before the rise of the CWS, antitrust enforcement was incoherent and lacked underlying neutral principles. In the words of Justice Potter Stewart, the only consistency was that “the government always wins.” Competitive practices could be condemned because they hurt the profitability of some businesses. Sometimes, courts would worry that prices were too low and would therefore permit “price floors” to protect small business. This lack of consistency led to a body of law that was contradictory and unpredictable, and that regularly undermined competition. By entrusting enforcement and antitrust policy to the discretion of unelected enforcement officials, competition policy was effectively removed from democratic oversight.
The CWS grounds antitrust in objective economics and tractable evidence. Adherence to the CWS renders antitrust judgments transparent and quantifiable by giving a clear benchmark for economic analysis. Without the CWS, courts might trade reduced competition and consumer welfare for a reduction in, for example, a business’s political influence. While achieving the latter may (or may not) be a worthy goal, there is no objective way to assess trade-offs between the two priorities. The CWS requires testable claims and counterclaims as part of a competition case. It allows antitrust cases to focus on a question that can be answered objectively: “Is the challenged conduct likely to make consumers better or worse off?”
The CWS considers innovation and quality, as well as price. The CWS has always encompassed aspects of competition beyond price, including innovation, quality, and product variety. The CWS is thus fully compatible with markets where products are offered at a zero price to consumers, or where the alleged source of harm is the loss of innovation. United States v. Microsoft, for example, hinged on an innovation theory of harm, as did the U.S. Justice Department’s lawsuit against the Visa/Plaid merger, which led to the merger being abandoned. As in other supply markets, anticompetitive conduct by businesses in the labor market has been ruled illegal under the CWS and both of the federal antitrust agencies have brought cases against this kind of conduct.
Antitrust is not a public policy Swiss Army knife. Antitrust is a bad tool to achieve goals other than increased competition, because it is often impossible to objectively compare the value of different competing ends. Where difficult trade-offs must be made between competing social goals, such as balancing economic growth with the environment or workers’ welfare, the legislative process is a better mechanism to weigh society’s preferences than the judgement of a court. Trying to use antitrust to achieve these ends is often an attempt to bypass the democratic process when that process does not deliver the outcomes that advocates want.
For further information, see ICLE’s submission to the FTC’s Hearings on Competition & Consumer Protection in the 21st Century: https://laweconcenter.org/wp-content/uploads/2019/07/Antitrust-Principles-and-Evidence-Based-Antitrust-Under-the-Consumer-Welfare-Standard-FTC-Hearings-ICLE-Comment-5.pdf
Written Testimonies & Filings Introduction Chairman Brown, Ranking Member Toomey, and Members of the Committee, My name is R.J. Lehmann, and I am a Senior Fellow with and Editor-in-Chief . . .
Chairman Brown, Ranking Member Toomey, and Members of the Committee,
My name is R.J. Lehmann, and I am a Senior Fellow with and Editor-in-Chief of the International Center for Law & Economics. ICLE is a nonprofit, nonpartisan research center that promotes the use of law & economics methodologies to inform public policy debates. Working with a roster of more than 50 academic affiliates and research centers from around the globe, we develop and disseminate academic output to build the intellectual foundation for rigorous, economically grounded policy.
I have been an active observer of the challenges facing the National Flood Insurance Program (NFIP) for 18 years. In my former life as a business journalist, I was from 2003 to 2011 the Washington bureau chief of two major trade publications covering the business of insurance. That stint included covering the 2004 and 2008 NFIP reauthorization debates and, of course, the devastating impact of Hurricane Katrina in 2005. In 2012, I co-founded the R Street Institute, where I remained until joining ICLE six months ago. Among my duties at R Street was running the Institute’s insurance policy research program, and I made NFIP reform a major part of my research focus.
I thank the committee for conducting this hearing, its first in four years on the topic of NFIP reauthorization. It has been nearly a decade since Congress last approved a long-term reauthorization of the NFIP. The program remains in need of structural reform, and the series of short-term extensions on which it has relied for the past four years leaves many parties—homeowners, business owners, builders, lenders, realtors, insurers, and insurance agents—without the clarity they need to make forward-looking decisions. One hopes Congress will be able to reach agreement this session on legislation that provides that clarity, while also making the adjustments needed to address the long-term challenges this program faces.
The past year has given us all an up-close view of how Americans respond when faced with the realization of remote and nominally “unforeseen” catastrophic risks. But, of course, the COVID-19 pandemic was not unforeseen at all. Public health officials and catastrophe modelers have long known that a viral contagion of this sort was not only possible, but inevitable. The 1918 influenza pandemic was within the lifetime of some Americans. Much more recently, another H1N1 influenza spread as a pandemic in 2009; we were merely fortunate that it did not prove to be terribly deadly. And we have in recent years seen other coronaviruses like SARS and MERS reach epidemic levels abroad.
Similarly, there is nothing unforeseen about the challenges facing the National Flood Insurance Program. It was established more than 50 years ago to provide coverage that private insurers would not; to reduce the nation’s reliance on post-hoc disaster assistance; to provide incentives for communities to invest in mitigation; and to be self-sustaining.
What is now clear is that the NFIP has not been—and, as currently structured, cannot be—self-sustaining. Since Hurricane Katrina, the program has been forced to borrow nearly $40 billion from the U.S. Treasury. Reforms passed as part of the Biggert-Waters Flood Insurance Reform Act of 2012 were intended to place the program on a path toward long-term fiscal sustainability by phasing out explicit premium subsidies and shifting more risk to the private insurance, reinsurance, and capital markets. But some of those reforms were scaled back or repealed almost immediately in the Grimm-Waters Act, passed in 2014. And even with $16 billion of the program’s debt erased by Congress in 2017, the NFIP remains $20.5 billion in debt to U.S. taxpayers as of the first quarter of Fiscal Year 2021, with no feasible plan ever to repay that debt in full.
Post-hoc disaster spending also continues to grow, with more than 90 percent of all federally declared disasters involving floods. And while the program has provided incentives for mitigation, by making cheap flood insurance available, it also has played a role encouraging development in flood-prone and environmentally sensitive regions. Moreover, due to the looming threat of climate change—which we know will drive both rising sea levels and more frequent and more severe precipitation events—it is more crucial than ever that Congress address the NFIP’s structural issues and the ways to correct its perverse incentives for where and how Americans live.
At its inception in 1968, the NFIP was not designed as a risk-based program. Property owners in participating communities were charged flat rates, irrespective of the level of flood risk their properties faced. That design was intentional, as the overarching goal was to encourage take-up, particularly by residents of the riskiest communities.
Shortly thereafter, in 1973, the program was redesigned to account for risk with the introduction of Flood Insurance Rate Maps (FIRM) that assign properties to various risk-rated zones and assess premium rates commensurate with the flood risk faced by that zone. Federally related mortgages on homes in high-risk zones that face a greater than 1 percent annual chance of flooding—also known as Special Flood Hazard Areas or 100-year flood zones—are required to purchase flood insurance.
But exceptions to risk-based ratings were built into the FIRM process from early on. Properties that joined the program prior to the introduction of rate maps could continue to pay non-risk-based rates through what are known as “subsidized” policies, which historically were assessed rates that were only 45 percent of their true actuarial liability.
Moreover, while the Federal Emergency Management Agency (FEMA) is required by statute to revise and update all its maps at least once every five years, mapping changes do not force rate changes for existing structures. These are treated as “grandfathered” properties, which continue to pay the rates assigned when their community joined the program or when its prior rate designation was finalized.
As a result, the NFIP has always taken in less in policyholder premiums than actuarial assessments would recommend. In the years just prior to Biggert-Waters, from 2002 to 2013, the Government Accountability Office (GAO) estimates the program collected $11 billion to $17 billion less in premiums than was actuarially prudent.
Biggert-Waters and the subsequent Homeowner and Flood Insurance Affordability Act of 2014 (HFIAA) placed business properties and second homes on a glidepath toward actuarial rates, with annual premium increases that are capped at 25 percent, while rate increases on subsidized primary homes are capped at 15 percent. Biggert-Waters would have placed grandfathered properties on a glidepath to actuarial soundness with a rate cap of 20 percent, but HFIAA amended that provision such that it only takes effect if a grandfathered property’s map changes again in the future. If it does, the grandfathered property would see rate increases that likewise would be capped at 15 percent.
Were the NFIP actuarially sound, it would have the resources to sustainably administer the program—including marketing and claims-adjustment expenses—and pay all expected claims that fall within the ordinary distribution of potential outcomes. But the NFIP would still experience—and in recent years, has experienced—outsized claims events like Hurricane Katrina, Superstorm Sandy, and Hurricane Harvey that fall in the tail end of the probability distribution. Indeed, those three events alone account for the overwhelming majority of the $40 billion the program has had to borrow since 2005.
Since Hurricane Katrina, the NFIP has made $5.06 billion in interest payments to service its debt to the Treasury but has managed to repay just $2.8 billion of principle. It is, by all accounts, completely infeasible that it will ever repay its debt in full. Indeed, in 2017, the Congressional Budget Office (CBO) estimated that, under its existing structure, the NFIP is expected to post an average annual loss of $1.4 billion.
That the program has proven structurally unsustainable was foreseen by its creators. In 1966, Lyndon Johnson’s Presidential Task Force on Federal Flood Control Policy warned Congress that creating a federal flood insurance program “in which premiums are not proportionate to risk would be to invite economic waste of great magnitude.”
Congress could assess that the benefits to homeowners and business owners in flood-prone regions merit the cost of subsidies. Even if that were the determination, however, the program’s existing structure largely functions not through express taxpayer subsidies, but by enabling cross-subsidies from inland NFIP policyholders to those in coastal regions. The CBO has found that 85 percent of NFIP properties exposed to coastal storm surge (properties classified as “Zone V”) pay below full risk-based rates. Altogether, 69 percent of Zone V properties are grandfathered, 29 percent are subsidized, and 13 percent are both grandfathered and subsidized.
In addition to subsidies flowing from inland policyholders to coastal policyholders, NFIP subsidies broadly flow from higher-income areas to lower-income areas. In 2013, the GAO reported that 29 percent of subsidized policies were in counties in the top decile of median household income and 65 percent were in counties among the top three deciles, while just 4 percent were in the bottom decile and 10 percent in the bottom three deciles.
Should Congress determine that it does expressly want to subsidize property owners in flood-prone regions, those subsidies should properly flow directly from the taxpayers. Laying the burden on inland and lower-risk NFIP policyholders discourages take-up of flood insurance, at the margin, when the goal should be much broader take-up to close the protection gap. Moreover, to the extent that subsidies are necessary to protect at-risk populations from displacement, it would be proper to transition to an income-based voucher system, rather than the existing system of subsidies and grandfathering tied to when the property joined the NFIP.
Over the past 50 years, the NFIP has helped to shape the landscape, with significant impact on the country’s built environment. In the first four decades after its passage, from 1970 through 2010, the number of Americans living in coastal counties grew by 45 percent and now comprises more than half the U.S. population. Nowhere is this shift more apparent than in my state of Florida. At the beginning of World War II, Florida was the least-populated state in the Southeast. As the recent 2020 U.S. Census figures confirmed, it is now the third most populated state in the nation. The NFIP was not the sole driver of that growth, of course. Air-conditioning also played a part. But by providing guaranteed and affordable coverage for the most common catastrophe risk facing property owners in a place like Florida, the NFIP has been a key enabler of the mass conversion of wetlands and barrier islands—nature’s built-in defenses against tropical storms and flooding—into acres and acres of manicured lawns and suburban tract housing.
But even as Americans spent much of the past half-century moving to areas at greater risk of catastrophic flooding, we have begun to see how anthropogenic climate change will make that problem much worse. Global sea levels rose by 2.6 inches from 1993 through 2014 and are projected to continue to rise by an average of one-eighth of an inch per year for the foreseeable future. Projections for the 21st century anticipate sea level rise of between 20 inches, should we manage to make sharp and immediate cuts to global carbon emissions, and six and a half feet, should the Antarctic ice sheet break up.
And yet, even facing these challenges, there has been no slowdown in Americans preferring to build and live in flood-prone areas. A 2018 analysis of FEMA records conducted by Governing magazine found that 15 million Americans lived in 100-year floodplains, where current rules for federally related mortgages require the purchase of flood insurance. That was a 14 percent increase from the turn of the 21st century, compared with 13 percent population growth in all other zones. Even more strikingly, a 2019 report by ClimateCentral looked at areas projected to have a 10 percent risk of coastal flooding by 2050. They found that, in eight coastal states, there were more homes built within this project 10-year flood zone than in all other areas. Development was twice as fast in the 10-year flood zone than outside of it in Delaware, Mississippi, New Jersey, and Rhode Island, while in Connecticut, it was three times as fast.
Losing land to the sea is not an entirely new phenomenon, of course. Sen. Kennedy’s home state of Louisiana has lost more than 2,000 square miles of land since the 1930s. But the scale of land loss we may now face, combined with the surge in development in flood-prone areas, is new. In 2016, a piece in the journal Nature Climate Change overlaid anticipated population growth with projected sea-level rise of roughly three feet to six feet, finding that between 4.2 and 13.1 million Americans would be displaced by inundation.
The changing nature of flood risk makes it even more crucial that FEMA, as the NFIP’s administrator, regularly update its Flood Insurance Rate Maps to keep up with changes on the ground. The evidence, however, is that the agency is failing to do that. A 2017 Department of Homeland Security Inspector-General’s report found that FEMA was up to date on just 42 percent of the NFIP’s flood hazard miles, far short of a goal of 80 percent set in 2009, and that the agency had not properly ensured that “mapping partner quality reviews are completed in accordance with applicable guidance.” In 2017, the CBO found that, of the 166 counties that produce more than $2 million in average annual flood claims, half were using maps that were more than five years old.
Sea-level rise and other impacts from climate change threaten to radically transform how we must deal with the risk of flooding. A 2019 study in Nature Communications had a grim projection about the frequency and severity of flooding and coastal storm surge: By the end of this century, today’s 100-year flood events in the Southeast and Gulf Coast will be expected every 1 to 30 years. Today’s 100-year events in New England and the mid-Atlantic can be expected every single year.
It is inevitable that, in at least some locations, we will have to consider pulling back from the coasts and moving Americans to higher ground. But an important first step is to stop making the problem worse.
“Managed retreat” is a controversial phrase, both because it connotes surrender in the battle against climate change and because it is taken to mean a radical realignment in the way we live. And yet, in some respects, managed retreat is longstanding policy. It is seen most clearly in FEMA’s Hazard Mitigation Grant Program (HMGP), the Flood Mitigation Assistance (FMA) Grant Program, and Pre-Disaster Mitigation (PDM) Program, all of which execute buyouts of flood-prone properties, which are then demolished, and the vacated land dedicated in perpetuity to open space.
While buyouts are likely to continue to be part of the solution to rising flood risk, there are serious questions about whether they could ever scale anywhere close to meet the scope of the problem. A 2019 report from the Natural Resources Defense Council found that, at the pace FEMA executed buyouts in the 30 years between 1989 and 2019, it would only be able to buy out another 115,000 properties by the end of the 21st century. For comparison, current projections are that as many as 13 million properties will be completely inundated by the year 2200.
Rather than tearing down the flood-prone properties that already exist, a more immediate approach would be to remove the incentives to build new ones. I authored a report last year that proposed doing so directly—by barring any new construction in 100-year floodplains from NFIP eligibility. Based on my review of NFIP claims data, had this policy been in place starting in 1980, the program’s payouts between 1990 and 2019 would have been roughly 13 percent smaller, representing $16.5 billion in savings.
What I could not quantify in my research, but which is likely even more crucial to the pressing challenge of climate adaptation, is how many of those severely flood-prone properties would not have been built in the first place, but for guaranteed NFIP coverage. In some cases, property owners in such areas might turn to the emerging private market for flood insurance, but they would be assessed risk-based premiums that, in many cases, likely would be prohibitive.
Of course, an additional benefit of this approach is that, unlike phasing out subsidies, it does not lay any new burden on existing policyholders. Similar approaches can be found in the Coastal Barrier Resources System (CBRS), a 37-year-old program that bars federal subsidies to development across a 3.5-million-acre zone of beaches, wetlands, barrier islands, and estuaries along the Atlantic Ocean, Gulf of Mexico, and the Great Lakes. Likewise, in Florida, the Legislature adopted a similar rule in 2015 that bars the state-sponsored Citizens Property Insurance Corp. from writing coverage for new construction located seaward of the state’s Coastal Construction Control Line.
But it is not enough simply to tell people where they cannot build; we must also tell people where they can. Many areas remain gripped by a serious housing affordability crisis caused by stringent land-use controls that make it excessively difficult to build new housing in places where people wish to live.
Therefore, in addition to the “stick” of removing the NFIP’s incentives to build in flood-prone areas, I propose an additional “carrot” of federal incentives for states that liberalize their land-use policies in areas of lowest flood risk.
Specifically, the Stafford Act currently requires that, when the federal government provides post-disaster relief to repair, restore, or replace damaged facilities, state, and local governments are responsible to pick up 25 percent of the cost. I propose that providing for dense housing in the lowest-risk flood zones—those classified as 1-in-500-year zones, or Zone X and Zone C in the current mapping system—would enable states to “buy down” the local cost share. For example, if a state were to abolish single-family zoning in the lowest-risk flood zones—e.g., allowing construction of accessory dwelling units and up to four-family homes, by right—the federal government’s cost-share for post-disaster recovery would rise to 80 percent or even 85 percent. This would begin the process of ensuring that, as rising seas force more Americans to move to higher ground, there will be sufficient housing stock to absorb them.
With that, I would be glad to answer any of the Committee’s questions.
 “The Watermark Fiscal Year 2021, First Quarter, Volume 13,” Federal Emergency Management Agency, p. 2. https://www.fema.gov/sites/default/files/documents/fema_watermark-report_12-2020.pdf.
 Bill Jones, “Biggert-Waters Flood Insurance Reform Act of 2012 Summary,” Nebraska Dept. of Natural Resources, February 2013. https://agriculture.ks.gov/docs/default-source/dwr-floodplains/summary-of-the-biggert-waters-act.pdf?sfvrsn=ce3ffec1_0.
 “Forgone Premiums Cannot Be Measured and FEMA Should Validate and Monitor Data System Changes,” Government Accountability Office, GAO-15-111, Dec. 11, 2014. https://www.gao.gov/products/GAO-15-111.
 “The National Flood Insurance Program: Financial Soundness and Affordability,” Congressional Budget Office, Sept. 1, 2017, p. 1. https://www.cbo.gov/publication/53028.
 Gary William Boulware, “Public Policy Evaluation of the National Flood Insurance Program (NFIP),” doctoral dissertation, University of Florida, December 2009, p. 14. https://ufdc.ufl.edu/UFE0041081/00001.
 “The National Flood Insurance Program: Financial Soundness and Affordability,” Congressional Budget Office, Sept. 1, 2017, p. 1. https://www.cbo.gov/publication/53028.
 “Flood Insurance: More Information Needed on Subsidized Policies,” Government Accountability Office, July
 Ross Toro, “Half of US Population Lives in Coastal Areas (Infographic),” LiveScience, March 12, 2012. https://www.livescience.com/18997-population-coastal-areas-infographic.html.
 “Is sea level rising?”, U.S. National Oceanic and Atmospheric Administration, Feb. 26, 2021. https://oceanservice.noaa.gov/facts/sealevel.html.
 Carling C. Hay et al., “Probabilistic reanalysis of twentieth-century sea-level rise,” Nature 517 (Jan. 14, 2015), pp. 481–84. https://www.nature.com/articles/nature14093.
 Robert E. Kopp et al., “Evolving Understanding of Antarctic Ice-Sheet Physics and Ambiguity in Probabilistic Sea-Level Projections,” Earth’s Future 5 (Dec. 13, 2017), pp. 1217–33. https://agupubs.onlinelibrary.wiley.com/doi/full/10.1002/2017EF000663.
 Mike Maciag, “Analysis: Areas of the U.S. With Most Floodplain Population Growth,” Governing, August 2018. https://www.governing.com/gov-data/census/flood-plains-zone-local-population-growth-data.html.
 “Ocean at the Door: New Homes and the Rising Sea,” ClimateCentral, July 31, 2019. https://ccentralassets.s3.amazonaws.com/pdfs/2019Zillow_report.pdf.
 “FEMA Needs to Improve Management of Its Flood Mapping Programs,” U.S. Department of Homeland Security Office of the Inspector-General, Sept. 27, 2017, p. 3. https://www.oig.dhs.gov/sites/default/files/assets/2017/OIG-17-110-Sep17.pdf.
 “Age of Flood Maps in Selected Counties That Account for Most of the Expected Claims in the National Flood Insurance Program: Supplemental Material for The National Flood Insurance Program: Financial Soundness and Affordability,” Congressional Budget Office, November 2017, p. 3. https://www.cbo.gov/system/files?file=115th-congress-2017-2018/reports/53028-supplementalmaterial.pdf.
 Reza Marsooli et al., “Climate change exacerbates hurricane flood hazards along US Atlantic and Gulf Coasts in spatially varying patterns,” Nature Communications 10:3785 (Aug. 22, 2019). https://www.nature.com/articles/s41467-019-11755-z.
 Anna Weber and Rob Moore, “Going Under: Long Wait Times for Post-Flood Buyouts Leave Homeowners Underwater,” Natural Resources Defense Council, Sept. 12, 2019. https://www.nrdc.org/resources/going-under-long-wait-times-post-floodbuyouts-leave-homeowners-underwater.
 R.J. Lehmann, “Do No Harm: Managing Retreat By Ending New Subsidies,” R Street Institute, February 2020. https://www.rstreet.org/wp-content/uploads/2020/02/195.pdf.
 Jane Smith and Michelle Quigley, “Along the Coast…A line in the sand,” The Coastal Star, Aug. 30, 2017. https://thecoastalstar.com/profiles/blogs/along-the-coast-a-linein-the-sand.
Presentations & Interviews ICLE Director of Law & Economics Programs Gus Hurwitz appeared in a segment on Nebraska-TV about the recent hack of the Colonial Pipeline and the . . .
ICLE Director of Law & Economics Programs Gus Hurwitz appeared in a segment on Nebraska-TV about the recent hack of the Colonial Pipeline and the state of cyber-security more generally. The full video is embedded below.
Presentations & Interviews ICLE Senior Scholar Julian Morris joined an Earth Day-themed edition of the Pacific Research Institute Podcast to discuss the Biden Administration’s “green infrastructure” proposals, California . . .
ICLE Senior Scholar Julian Morris joined an Earth Day-themed edition of the Pacific Research Institute Podcast to discuss the Biden Administration’s “green infrastructure” proposals, California energy policy, fuel-emission standards, and how California’s housing crisis. The full episode is embedded below.
Written Testimonies & Filings The signatories of this letter represent a broad range of public interest organizations who urge that any state laws still prohibiting car companies from selling their cars directly to consumers, or opening service centers for those vehicles, be amended to permit direct sales and service of EVs
We, the signatories of this letter, represent a broad range of public interest organizations. Our individual interests include such diverse matters as environmental protection, fair competition, consumer protection, economic growth and workforce development, and technology and innovation. Some of us frequently find ourselves on different sides of public policy debates. However, today we find common ground on an issue of considerable public importance concerning sales of electric vehicles (“EVs”). Specifically, we urge that any state laws still prohibiting car companies from selling their cars directly to consumers, or opening service centers for those vehicles, be amended to permit direct sales and service of EVs
Written Testimonies & Filings The signatories of this letter, active or emeritus professors employed at public or private universities in the United States, come from across the political spectrum, and have a wide variety of views on regulation, environmental and consumer protection, and free enterprise as a general matter, but find common ground on the important issue of automotive direct sales.
We, the signatories of this letter, are active or emeritus professors employed at public or private universities in the United States. We specialize in economics, competition policy, market regulation, industrial organization, or other disciplines bearing on the questions presented in this letter. We come from across the political spectrum, and have a wide variety of views on regulation, environmental and consumer protection, and free enterprise as a general matter, but find common ground on the important issue of automotive direct sales.
TL;DR Returning to a pre-Consumer Welfare Standard state of the law would lead antitrust enforcement to become confused, contradictory, and ineffective at promoting competition. The CWS makes antitrust economically coherent and democratically accountable.
In antitrust law, the Consumer Welfare Standard (CWS) directs courts to focus on the effects that challenged business practices have on consumers, rather than on alleged harms to specific competitors. Critics of the standard claim this focus on consumer welfare fails to capture a wide variety of harmful conduct. In addition to believing that harm to competitors is itself a valid concern, critics of the CWS believe it leads to harmful concentrations of political and economic power by biasing antitrust enforcement against intervention. Under this view, the CWS contributes to such harms as environmental degradation, income inequality, and bargaining disparities for labor.
Returning to a pre-CWS state of the law would lead antitrust enforcement to become confused, contradictory, and ineffective at promoting competition. The CWS makes antitrust economically coherent and democratically accountable.
Read the full explainer here.
Written Testimonies & Filings "It is profoundly more important that Congress do its job to get assistance to the businesses, workers and communities who need that help right now that it is to pretend to have the answers in 2020 to a crisis of unknown and unknowable dimensions that may befall us in 2025 or 2050 or 2100."
Chairman Clay, Ranking Member Stivers and members of the subcommittee,
My name is R.J. Lehmann, and I am editor-in-chief and senior fellow with the International Center for Law & Economics. ICLE is a nonprofit, nonpartisan research center that works with a roster of more than 50 academic affiliates and research centers from around the globe to develop and disseminate academic output and build the intellectual foundation for rigorous, economically grounded public policy.
I am a recent addition to the ICLE staff. My own background is that I have spent the past 17 years as a journalist and public-policy analyst specializing in the business of insurance. That includes running the insurance policy program at the R Street Institute, which I co-founded in 2012.
The COVID-19 outbreak has triggered unprecedented interruption in the operations of businesses across the country and around the world. While roughly 37 percent of U.S. businesses maintain insurance policies to cover the loss of business income due to direct physical damage to a business property, such policies are not designed to insure revenue loss resulting from a pandemic, even where closure is required by a civil authority order. Indeed, many policies contain explicit endorsements clarifying that viruses and bacteria are excluded as causes for business interruption and loss-of-use coverages.
Earlier this year, Congress sought to address the disruption caused by COVID-19 through the Paycheck Protection Program and there have been various efforts to extend further relief to affected employers and employees. But it is understandable that many seek a more permanent solution and look to insurance markets as offering the framework to provide it.
I agree entirely with the analysis that the pandemic has highlighted a massive protection gap in commercial insurance products. I also agree that it is a problem that almost certainly calls for a governmental solution. I would, however, raise the threshold question of whether insurance is actually the best means to accomplish the public policy goals in question.
Insurance is a system of risk transfer, not a system of economic relief. Even if private insurers could provide this coverage—on their own or with government support—it is not clear their incentives would align with public health goals or with the aims members of Congress likely have in mind.
I would urge the subcommittee and Congress generally to proceed deliberatively before erecting structures that may not prove to be well-suited to the crisis we are currently experiencing, much less unforeseen future crises whose nature and scope we cannot know. In sum, do not legislate for the next pandemic when we are still in the midst of dealing with the current one.
In the business of insurance, there are certain general characteristics that determine whether it is possible, in theory, to insure a given risk. These include having a large number of similarly exposed individuals and having losses that are reasonably predictable. A textbook example of an uninsurable risk would be intentional acts, such as arson. You could not transfer to an insurer the risk that you will burn down your own home, because that risk is fully within your control.
Business interruption caused by a pandemic is not uninsurable in the same sense that intentional arson is uninsurable. There were insurance products available to cover loss of business income due to viral contagion before COVID-19 hit our shores, although clients’ interest in those products was reportedly fairly limited. There are still products that offer such coverage now, although the price of coverage has gone up significantly. On the micro level, for any given insurer and any given insured, viral business interruption is an insurable risk.
The problem is at the macro level. There is only a limited amount of capital that insurers would be willing to devote to a risk like pandemics. Some insurers will write some coverage. They might, for instance, cover a restaurant’s risk of food spoilage resulting from an extended shutdown. But they will not and should not gamble their entire balance sheets. And the capacity that the global insurance and reinsurance industry would ever be willing to devote to this risk cannot possibly match its unique scale.
In this macro sense, for a risk to be insurable, it must be possible to manage it through careful underwriting and diversification. Global pandemics make that impossible. They hit every business sector and every geographical region simultaneously. They even degrade the invested assets insurers use to back up their promises. In a scenario where half the global economy shuts down overnight, there is no world in which the insurance industry can single-handedly carry the other half on its back.
The only entity with the financial resilience, the balance sheet and the risk tolerance to offer such assistance is the federal government itself.
When I have appeared before this committee in the past, it has been to warn about the dangers of moral hazard that frequently accompany government intervention in insurance markets. The 50-year-old National Flood Insurance Program is a prime example of this danger. By providing insurance coverage to all comers at rates insufficient to match the level of risk, the NFIP encourages development in disaster-prone and environmentally sensitive regions.
While I remain disposed to skepticism about government insurance programs, I do not believe any of the proposals discussed here today—such as Rep. Maloney’s Pandemic Risk Insurance Act (PRIA) or the joint-trades’ Business Continuity Protection Plan (BCPP)—pose much, if any, risk of moral hazard. With or without insurance and with or without government support, there is likely nothing at all a business owner could do to avoid the impact of a pandemic. Indeed, the greater threat is a business that would go out of its way to keep its doors open, despite the dangers that could result.
Which is not to say moral hazard is irrelevant to the pandemic or to how insurance responds to it. Business interruption is far from the only insurance coverage implicated by viral contagion. Most obviously, employers in nearly every state must provide, on a no-fault basis, workers’ compensation coverage for illnesses contracted on the worksite or in the usual course of job duties. Businesses also obtain various commercial liability coverages that could be triggered if they breach a duty of care or otherwise recklessly cause foreseeable harm by exposing a customer or other third party to the virus.
Where a business is a potential nexus of contagion, we should want them to internalize that cost and to adjust their operations in the interest of better protecting public health. That could mean investments in mitigation, adaptation and prevention. It could mean making sure a worksite is well-stocked with personal protective equipment or that the spatial orientation is changed to reduce the risk of infection.
These casualty and liability lines of business exemplify how risk-based insurance rates can serve a regulatory function, providing price signals that encourage businesses to adopt those practices that best protect their employees and others. If Congress is to move forward with creating a federal insurance or reinsurance program to manage pandemic risk, I would strongly urge to focus tightly on the unique challenges of business interruption and not extend it to casualty and liability lines of coverage. It would be extremely unwise to extend public subsidies that could serve to encourage recklessness.
The approach proposed by PRIA is to graft coverage for pandemic risks onto the existing structure of business interruption coverage by providing a $750 billion federal backstop for insurers who choose to participate, with the industry retaining only about 5 percent of the total risk. But only a minority of businesses—a little over a third—currently maintain business interruption coverage. Given that the program would be voluntary for insurers to offer and voluntary for insureds to purchase, it is reasonable to assume less than a third would ultimately elect to carry it.
Even for those who do, there are real questions about whether the sorts of claims we can reasonably anticipate policyholders to make would actually be paid. PRIA is a good faith attempt to extend coverage and avoid the sorts of claims disputes that have prompted hundreds of businesses to sue their insurance companies. The program may well extend coverage but there are some predictable areas of conflict that will almost certainly land policyholders back in court.
Business interruption and contingent business coverages are components of commercial property insurance policies. PRIA would ask participating insurers to vitiate standard contract language that excludes claims for viral pandemics. But that would not change a more fundamental presumption of any property insurance policy: that there must be demonstrable physical damage to the insured property.
To be sure, there are legal theories—some of them currently being tested in the courts—that business closures are necessitated by viral contamination of surfaces within the covered property. But whether that is applicable in any given case is going to depend both on the nature of the virus and the nature of the property. If contamination can be easily cured by wiping down surfaces, that is going to be an extremely limited claim. The reality is, creative legal theories aside, most business closures in this pandemic have had nothing to do with potentially contaminated surfaces. They have instead sought to avoid transmission between people. That is not a risk covered by property insurance.
There is also the question of what triggers coverage. Both PRIA and the BCPP proposal tie coverage to public health emergency orders, such as mandated shutdowns. But the experience we have had in this pandemic shows why that is almost certainly insufficient. The initial wave of business closures did not come as a result of mandated shutdowns; they were in response to customers choosing to stay home. A number of states and localities never formally “shut down” businesses at all and yet still suffered precipitous drops in economic activity. As of October, after nearly all states lifted shutdown orders, airport traffic remained down 60 percent from before the pandemic and OpenTable restaurant reservations were down nearly 40 percent.
There is no “business is bad” insurance. Without some sort of external trigger, there is no cause to make a business interruption claim for a business that has merely been depressed, not interrupted.
Again, insurance is risk transfer, not economic assistance. It should give lawmakers pause that PRIA would represent a $750 billion investment of taxpayer dollars in a program that two-thirds or more of businesses will not access, where many claims will still be denied and where the kind of loss that will be most commonly experienced by businesses does not and cannot constitute a claim.
A central argument for a public-private partnership to support business interruption insurance for pandemics is that, while the federal government can bring its balance sheet to bear, it does not have the insurance industry’s expertise in modeling, managing and mitigating risk. I find myself in the uncomfortable position of critiquing that argument, given that it is one that I myself have made for the entirety of my career in public policy, whether the subject was flood insurance or crop insurance or terrorism insurance.
But it is important to ask: modeling, managing and mitigating the risk of what, specifically? In the case of business interruption insurance, it is not the risk of viral transmission. It is not even the risk of a pandemic, not quite. It is the risk of business closure as a result of a pandemic.
I mentioned earlier that I do not believe there is anything a business owner could do to avoid the impact of a pandemic. What they could do—what risk-based insurance might encourage them to do—is to avoid making a claim by refusing to shut their doors and by pressuring local leaders not to issue mandatory shutdown orders. From a public health perspective, that is the opposite of what we want to happen. And yet, we see it has happened. It is one reason we see the incoherent outcome that, in some cities, schools are closed while bars and restaurants are allowed to remain open.
Like any efficient insurance market, a risk-based insurance market for pandemic business interruption insurance would seek to align the incentives of the insured and the insurer. Among the ways this is generally accomplished is through deductibles, which discourage policyholders from making claims for shallow losses. More broadly, it is accomplished by matching premiums to the level of risk. For example, businesses that could continue operating remotely even in the midst of a pandemic are low-risk and would be offered the most affordable coverage.
On the other hand, risk-based insurance premiums for restaurants, gyms, theatres, barbers, manicurists—any environment where you have close personal contact with strangers or indoor mass congregations of people—would be punishingly expensive. Actuarial science is notoriously complex, but the basics of risk-based premiums are fairly simple: frequency times severity. The severity of a pandemic contagion, even if it happened just once a century, is so extreme that a risk-based premium could not be affordable for the overwhelming majority of small businesses—or even churches and social groups—that rely on in-person human interaction. If they were forced to buy this coverage, many could simply no longer exist. That is not a socially desirable outcome.
The saving grace—the reason we would not likely see that outcome—is itself discouraging. Because the coverage would be voluntary, these sorts of businesses almost certainly would not take it up. Thus, the very businesses who have been hardest hit by this pandemic and would likely be hardest hit in any future one would remain the most exposed.
Proposals like PRIA and the BCPP initially were put forward in the early days of the pandemic. The folly of imagining that lawmakers could have the foresight to craft structures that anticipate future pandemics is just how much has changed in the few months since those proposals were debuted.
I consulted with the insurance trades on the earliest drafts of what became the BCPP. I believe it was my idea to cap the maximum coverage the program would offer at three months of business income. Back in April, that seemed like a generous benefit. Seven months later, with caseloads breaking new records every day and a vaccine at least months away from broad distribution, it seems much less so.
PRIA was originally a $500 billion proposal. It is now a $750 billion proposal. But it is also clear that that amount, while a lot of money for a federal program, is not nearly enough for the scope of the problem. Moreover, PRIA is structured as a single pot of money. Were it in place during COVID-19, it may well have been completely depleted by the earliest phases of the pandemic, when the virus was contained largely to New York and New Jersey. By the time the second wave spread across the Sunbelt in June and July, there may have been nothing left, to say nothing of the third wave we are now encountering.
Any program that Congress does establish should follow some broad principles gleaned from our experience thus far with COVID-19. But we also should be humble about how much we still do not know even about the current pandemic, much less the next one.
The program should endeavor for broad participation, with a bias toward encouraging small businesses, nonprofits and community organizations to take part. Larger enterprises already have available to them a number of insurance options that small businesses do not, from the ability to create captive insurance companies to relatively easy access to bespoke products in the excess and surplus lines market. Indeed, our experience with the Terrorism Risk Insurance Act suggests we should be particularly skeptical of how large companies might use captives to game a structure like PRIA, including for tax-avoidance purposes, with the overwhelming majority of risk passed on to taxpayers.
If there is to be a premium or a participation fee for the program, it should be flat, not risk-based. One common concern of insurance markets is the problem of adverse selection. Because an insured has more information about their own risk than an insurer does, the riskiest businesses are also the most likely to buy coverage. While that is a problem for writing insurance profitably, the public health goals of pandemic response turn that issue on its head. The businesses most at risk of shutting down are the ones to whom we most need to extend a safety net. We want them to cooperate with shutdowns, not push back.
In the spirit of broad participation, the insurance industry should not be the sole marketing force for any federal pandemic risk program. PPP was administered primarily by banks and credit unions and that appears, on balance, to have worked pretty well. There is no reason that lending institutions, payroll processing companies or credit card issuers could not help to sign up participants.
The same applies when it comes to distributing benefits. The insurance industry’s claims-adjustment force is already pushed to capacity to keep up with disasters like hurricanes and wildfires. Adjusting business interruption claims requires special training. Moreover, adjusting claims is a slow and laborious process, which conflicts with the goal of getting money out the door as quickly as possible. A parametric trigger, such as the one in the BCPP, would better accomplish that goal.
The BCPP balances the parametric structure by enumerating specific purposes for which benefits can be used, like rent and payroll. Any disbursed benefits not used for those purposes could later be clawed back. While this is how PPP worked and how the BCPP would work, it is not how business interruption insurance works. A policyholder that makes a claim for business interruption might use the money to continue paying staff, but there would be nothing requiring them to do so. Even with PRIA in place, a business owner could make a claim for interruption while simultaneously placing all his or her employees on furlough. Lawmakers should understand that.
Another question is whether it is wise to create a federal program at all. Given that public health orders are overwhelmingly the jurisdiction of state and local governments, one option would be to allow the states to create their own programs, with the U.S. Treasury partially reimbursing the cost. This would require Congress to establish some minimum guidelines for qualifying programs. But so long as the reimbursement formula was relatively transparent and applied equitably, it would permit innovation and local customization in program design, while also limiting the “run on the bank” danger that a single pot of federal money like PRIA might face.
But above all, my recommendation to lawmakers is to take your time. Perhaps more private solutions, from the insurance industry or some other source, will emerge to meet these challenges before the next pandemic. Perhaps Congress would again have to provide ad hoc assistance. It is profoundly more important that Congress do its job to get assistance to the businesses, workers and communities who need that help right now that it is to pretend to have the answers in 2020 to a crisis of unknown and unknowable dimensions that may befall us in 2025 or 2050 or 2100.
Thank you, and I would be happy to answer any questions.
TOTM On Thursday, March 30, Friday March 31, and Monday April 3, Truth on the Market and the International Center for Law and Economics presented a blog symposium . . .
On Thursday, March 30, Friday March 31, and Monday April 3, Truth on the Market and the International Center for Law and Economics presented a blog symposium — Agricultural and Biotech Mergers: Implications for Antitrust Law and Economics in Innovative Industries — discussing three proposed agricultural/biotech industry mergers awaiting judgment by antitrust authorities around the globe. These proposed mergers — Bayer/Monsanto, Dow/DuPont and ChemChina/Syngenta — present a host of fascinating issues, many of which go to the core of merger enforcement in innovative industries — and antitrust law and economics more broadly.
Read the full piece here.